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China Proposes Revisions to Laws on Commercial Bribery

China Proposes Revisions to Laws on Commercial Bribery

March 3, 2016

On February 25, 2016, China's State Council released proposed draft amendments to the anti-bribery provisions of China's Anti-Unfair Competition Law ("AUCL"), a broad –ranging law with provisions on commercial bribery as well as trade secrets, competition, advertising, procurement, and more. The proposed AUCL amendments follow revisions to the anti-bribery provisions of China's criminal law in 2015, and like those changes, simultaneously bring more clarity to the definition of commercial bribery as well as an increase in penalties. Additionally, the proposed changes indicate an attempt to update China's commercial bribery laws to reflect better current market practices. We summarize below key changes in the proposed amendments.

1. Clarification of the term "Commercial Bribery"

The AUCL's current provisions on commercial bribery date to 1993 and have long presented perils to businesses in light of their ambiguous language and potentially broad reach. Current provisions prohibit "business operators" from offering "money, property, or any other means" to bribe others in order to sell or purchase goods, with this language not actually mentioning or defining "commercial bribery." As a result, the language could conceivably be interpreted to include many business activities, leaving businesses little option but to rely on enforcement trends by authorities to discern which activities are perceived as commercial bribery and which are not. However, such reliance on enforcement trends has its perils due to frequent shifts by enforcement authorities or different interpretations between localities. For instance, the current AUCL's provisions refer to sales discounts, but it is unclear when offering such discounts would violate the AUCL or be permissible. Sales discounts are nonetheless widespread in China, but often vary by locality depending on how local authorities have interpreted the AUCL.

In this regard, the proposed amendments to the AUCL offer a welcome attempt to bring greater clarity to the definition of commercial bribery. The proposed definition of commercial bribery is:

Commercial bribery is where a business operator provides, or offers to provide, financial benefits to a transaction counterparty, or to a third party with influence over a transaction, for the purpose of obtaining an opportunity related to the transaction or competitive advantages.

In addition to this general definition, the proposed amendments attempt to clarify distinctions between legitimate business practices and commercial bribery by including three examples of commercial bribery, including (i) obtaining benefits in the course of or through public services; (ii) giving economic benefits by making false or incomplete accounting entries; and (iii) providing or promising to provide economic benefits to a third party that has influence over a transaction. The new definition brings clarity to areas long ambiguous under the current AUCL, including (i) a clear prohibition on promising commercial bribes (e.g., a bribe need not actually be paid for commercial bribery to take place) and (ii) prohibiting payments of commercial bribes through third parties/agents. While the proposed amendments do not define "financial benefits," this same term was used in the recent amendments to the anti-bribery provisions of China's criminal law in 2015.

2. Commercial Bribes through Third Parties

It's noteworthy that the indirect bribe through a third party would be clearly prohibited under the AUCL amendments. Additionally, such "third party" refers to both entities and individuals, which may include the parent and affiliated company of the counterparty of the transaction, the supervisor and direct relative of the opposing individual, and even any government officials who may have influence over the transaction. In practice, the PRC People's Supreme Court and State Administration of Commerce and Industry have indicated that such payments through third parties may constitute commercial bribery, but this proposed amendment would bring greater clarity to this issue.

3. Accounting Requirements

The proposed changes would also more clearly expand commercial bribery to accounting matters, echoing FCPA requirements. The proposed amendments describe the "provision of financial benefits between business operators that are not truthfully recorded in agreements and accounting books" as an example of commercial bribery. While the current AUCL requires that discounts and commissions be accurately recorded in company books and records, the current AUCL does not otherwise clearly have accounting requirements under commercial bribery provisions. This new language signals a clearer intent to hold companies to account for attempts to disguise improper payments in books and records. Such focus could have sweeping implications in China, where businesses frequently mischaracterize payments for a variety of reasons, such as tax liability. It is unclear whether PRC authorities would take a strict approach to these accounting provisions, similar to the U.S. Securities and Exchange Commission's application of FCPA accounting provisions, such that even accounting matters unrelated to commercial bribery (e.g., tax liability issues) may violate these accounting provisions. If strictly enforced by PRC authorities, these accounting provisions may spur Chinese companies to develop more robust internal controls and compliance policies to reduce any possible inaccurate accounting entries.

4. Vicarious Liability for Employee Conduct

Other changes in the proposed amendments to the AUCL include provision for strict vicarious liability for companies regarding the actions of their employees, and liability for business partners acting on a company's behalf (e.g., distributor, marketing agency, etc.) that a business operator should have known committed commercial bribery.

5. Penalty Increases

The proposed changes would also increase penalties for commercial bribery. The current AUCL provides for penalties ranging from RMB10,000-200,000 plus disgorgement of profits, whereas the proposed amendment would impose fines of 10-30% of the revenue related to commercial bribery, and fines of RMB100,000-1,000,000 for third parties a business should have known committed commercial bribery.

The proposed amendments to the AUCL's commercial bribery provisions illustrate the continued focus on anti-bribery matters by Chinese authorities. In many ways, the proposed changes are welcome in that they bring greater clarity to what activities constitute commercial bribery. However, the amendments also indicate an intent to expand commercial bribery into new areas, including accounting requirements and the actions of third parties/business partners, and the language on these new areas continues to leave many questions unanswered. The comment period for the proposed law closes March 25, 2016, and Dentons will continue to monitor developments and provide updates.

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